Friday, August 3, 2012

Time to sell the house & trade down?

Annuity rates crisis puts pensions in 'death spiral' with worst retirement pay outs in history

"The Bank of England’s £375billion money-printing policy has triggered ‘a death spiral’ in pensions which has led to the worst retirement payouts in history, according to experts. Annuity rates, which dictate how much a worker gets from their pension pot for the rest of their lives, hit an all-time low yesterday, and are likely to keep falling".

Posted by alan @ 10:33 AM (4486 views)
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26 thoughts on “Time to sell the house & trade down?

  • I was chatting to my mother last night. Boomer 62yrs, who moved to NZ in 2006. She was telling my that her pension is now only worth half of what it was worth in 2006 due to the depreciation of the Pound against the NZ dollar.
    I have a feeling that she has not factored in the reduced annuity rates.

    The strength of the NZ dollar is hurting exporters, China is slowing down and Australia is about to have a HPC, I therefore conclude that the NZ dollar will fall back down somewhat over the next 18 months.
    Meanwhile those who moved to Europe have seen there pension income rise since the £1.00 to 1.00 eur exchange rate days.

    From the comments section:

    “Do not worry Mr Cameron and Mr Osborne we pensioners will remember your total lack of support when the next election arrives because it is us who go to the polling stations.
    – Lc, London, 3/8/2012 8:45”

    So folks: Looks like a return to Labour, more printing and screwing over the younger generation.

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  • I am here in Australia, been here nine weeks today as a resident; the crash is on over here, slowly picking up momentum, the exchange rate is ruthless at 1.45. Gone through a fortune so far, just hope it will be worth it…..

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  • mark wadsworth says:

    QE is a bit of a mixed bag for the pensioners.

    On the one hand, they want low interest rates and reckless lending to “help preserve the wealth in their home which will fund their retirement and allow them to leave something to the next generation (cont page 94)” and on the other hand, those who haven’t already signed up for an annuity lose a load of real hard cash.

    Those who have MEWed definitely are on the side of lower interest rates;
    Those who haven’t MEWed and have yet to sign up to an annuity (or who have lots in spare cash) want interest rates to go down;
    Those who already have an annuity (which is fixed) and/or don’t have any spare cash or investment income probably want lower interest rates as well.

    So there you go, I don’t think that pensioners (being the most rationally greedy group of voters who exercise their voting power quite ruthlessly and should be an example to us all) as a group can have a coherent policy on this.

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  • mark wadsworth says:

    Damn, typo

    Should read:

    Those who haven’t MEWed and have yet to sign up to an annuity (or who have lots in spare cash) want interest rates to go UP

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  • Why does no-one ever point out that paying interest on savings is also money printing!

    Anyway QE and ZIRP can be seen as deflationary policies (higher prices, lower returns on savings) if they fail to have the desired effect of expaning credit, or making credit cheaper. They are not expanding credit because banks are now being prudent. They are not making credit much cheaper as the benefits of ZIRP are not being passed on by the banks – a policy I don’t know whether to cheer or boo. Cheer because it makes HPC more invevitable. Boo because it’s the latest chapter in banking corruption.

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  • general congreve says:

    @1 – Please let it be Labour. Fast forward to Go, collect your £200 🙂

    @3 – Exactly right. You can’t serve two masters.

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  • Mark,

    Agreed on pensioners!

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  • Khards,

    The AUD is fcked. Can’t decide if it’s more or less fcked than sterling.

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  • “The AUD is fcked.”

    Against what is the important question? EUR, USD, Soverigns?

    If all of the currencies are fcked then they are all as strong as each other.

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  • general congreve says:

    @8 – Agreed.

    @9 – If they devalue at roughly the same pace they may remain strong as each other, what exchange rate they maintain for real goods, not other bit of worthless paper, is the true measure of value.

    HANG ON A MINUTE!!! Have BW and Khards got their login details mixed up?! I’m having the wrong conversation with the wrong person. What is going on today?

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  • Credit has obviously been sufficient to maintain house prices so far (with luck this may be changing) and zirp has prevented wider selling – mortgage rates are still pretty low.

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  • mark wadsworth says:

    I’m with Khards on this one, while you can make a case against just about every currency, it’s impossible for them all to devalue against each other at the same time.

    And we will not have runaway high inflation, it just doesn’t happen until/unless you have currency controls/pegged exchange rates etc.

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  • Khards,

    By fcked I mean on a relative currency basis it’s overvalued ie overvalued as against other currencies. I see the AUD as ponzi’d twice, once relative to its unburst and gargantuan housing bubble and once relative to China’s unproductive demand for state run GDP growth.

    That said your final point @9 is excatly what I’ve been banging on about for years, and precisely why if everyone tries to crash their currency the net effect of so doing is precisely nothing.

    And MW is with the point too. GC common sense is prevailing I see!

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  • No mention here of the extent of Pension Fund investment in stockmarkets, which have been boosted by QE.

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  • GC, If you were a farmer growing wheat and then GBP, EUR and USD all devalue together do you think that you would be able to sell your real goods for more?
    The farmer will pay for his electricity, oil and fertilizer in one of the devalued currencies.

    (The login’s are not mixed up. I just don’t trust any theories)

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  • general congreve says:

    @14 – I think you may have the wrong end of the stick. Please see below.

    @16- No complicated theories, just an explanation by way of a simple model of A&B world:

    Two countries in the world: 1 & 2
    Each country has it’s own currency £ and $, starting with 1:1 exchange rate.
    One commodity: wheat as £1a or $1 a bushel.

    Country one wishes to devalue to pay off its debts the sneaky way, it reduces the value of the £ by 50%.
    The exchange rate is now £2 to $1
    A bushel of wheat now costs £2 or $1

    Not to be undercut, country B engages in a currency war with country A and deliberated pegs the $ to the £, printing to maintain the peg. (Just as the Swiss are doing now vis-a-vis the Euro)

    Now the exchange rate is back to £1 or $1
    But the bushel of wheat costs £2 or $2

    You have lost in real terms by holding both currencies. Your savings are worth half as much and it is doubtful you will be getting a pay rise of 100% to match the devaluation of the currency.

    That is why a currency that can’t be devalued is obviously your best, as these two graphs of the pegged Euro and Swiss Franc (as of last summer) clearly demonstrate. I have attached a control graph of the dollar, which is not currently been devalued to the same extent (but surely will be) for comparison:

    http://i50.tinypic.com/v2zcrt.gif

    http://i45.tinypic.com/erc1kz.gif

    http://i48.tinypic.com/ibkm5u.gif

    As can be clearly seen, both have lost nothing against each other, but have fared identically against a real thing purchased with the easily printed paper.

    Gentlemen, I implore you. Do not let hubris get in the way of your future financial security!

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  • general congreve says:

    Sorry, here they are:

    Image and video hosting by TinyPic

    Image and video hosting by TinyPic

    Image and video hosting by TinyPic

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  • I would be interested to see a basket of goods rather than just one commodity.

    I see that your explanation holds true due to the fact that all countries experience inflation together, which I comes back to more currency chasing the same goods.

    Sold!

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  • GC your model assumes that when the volume of currency is doubled the volume of savings remains static. This is not what is being posited. Instead what is being said is that if each country prints twice as much money no one is effected, not even savers because their savings have doubled.

    Of course you could double the currency of some and not others, which is what yout talking about but that just isn’t the point being made.

    The charts per se are as meaningful as Stuart Law arguing is right on housing based on a graph showing UK house prices over a 15 year period. Price can always be an irrational reaction.

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  • Khards,

    I think you were right the first time. All countries cannot experience inflation together, because the value of a currency is based (and can only be based) on its value relative to other currencies. If everyone inflates together then no-one inflates.

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  • general congreve says:

    @20 @21 – Jesus wept. So when Gordon Brown devalued the pound by 30%, did you get an extra 30% savings credited to your account? If you did then I’m going to be even more p1ssed off the devaluation, because I didn’t get mine.

    When sterling is devalued by inflation by 5% or whatever on a yearly basis, does the BoE kindly top up your savings account by the same amount?

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  • stillthinking says:

    BW, when you say the AUD is a goner surely you are anticipating a government response because the double whammy of excess production to China and the housing bubble do not themselves mean anything. The value of the dollar and the currency is a political decision. Are you so sure that the Australian government will blindly go along with QE? The Aussies are well travelled people used to their currency going up in value against others, these are not dum dum UK voters with sequestered pension savings so I don’t think this is necessarily going to be the case.
    The underlying trend will be particularly severe debt deflation. The value of gold IMO is a product of the fact that so many people have a deep conviction that as an asset it will appreciate in nominal terms, and this conviction is overriding more so than the facts that most assets are becoming cheaper in nominal terms and we edge ever closer to the point where the central banks can no longer support asset prices.

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  • general congreve says:

    @22 – I will pursue an answer on this if I don’t get one on this thread BW! I have you now 🙂

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  • general congreve says:

    @19 – Glad you get it, I think BW might now too, as we haven’t heard back from him. 😉

    Just to answer your point. I would look for a basket of goods graph, but this thread is about to go off the front page, I’ll try later, but I assure you the results will be the same.

    Another way to think of it is this. Zimbabwe hyperinflates. Then the rest of the world hyperinflate to the same level. Is Zimbabwe’s currency now back to the value it was. While Z$1.5 Zimbabwe dollars that was once worth about US$1, would now be worth that again, would the price of a beer suddenly drop back from hundreds of thousands of Zim dollars to Z$1. No. There is still too much paper floating around in Zim, nothing would change there. And no one would get any magic inflation matching savings bonus from thin air either. BW’s argument is beyond parody.

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  • Your point is that the BOE prints, then loans it to the banks, who buys government debt. The government then distribute the money to the 1% and not the rest of us.

    I think both arguments are true.

    On a pure technical basis, I declare that the value of the USD, GBP and EUR are worth 50% of what they were yesterday. Today you will find wages have doubled, savings have doubled and debt is doubled.
    The above scenario no one wins, however we know that it is your scenario that is more lifelike.

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  • general congreve says:

    @27 – Not following you. If currencies are worth 50% of what they were yesterday, wages, savings and debt have halved, not doubled. Just ask yourself why they devalue, to reduce the burden of debt in real terms, not increase it! Where does the other side of the equation balance to half that debt, from a halving of wages and savings in real terms.

    When Iceland’s currency devalued by 2/3rds against the Euro in 2008, did the value if Icelanders savings triple? Or did the price of Euro priced imports triple?

    If the Euro had devalued the following day by 2/3rds, imports would still be triple what they were before. The exchange rate might be better, but Euro producers would be charging three times as much for stuff before too long. The value of a currency will rebalance to reflect the underlying supply of labour and goods. If that remains unchanged then devaluing or printing only leads to price increases, even if other currencies follow the same policies.

    This is basic stuff, surely?

    I highly recommend ‘Jim Rickards – Currency Wars’ as a good book on the subject.

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